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11/30/2011 @ 5:57PM2,697 views

What Bernanke & Friends' Latest Move Means For The Market

Central banks around the world agreed to drop the rates on dollar liquidity swaps Wednesday, in a bid to provide access to lower-cost greenbacks to institutions struggling with short-term funding issues. The market took the news as a positive, with U.S. indexes spiking more than 4%, but some participants are advising caution.

Seth Setrakian, co-head of equities at First New York Securities, warns that “if things are so direly bad [to prompt the liquidity move] you should be worried.” After using the battering of stocks in last week’s holiday-shortened trading to go long, Setrakian has come back to a more bearish stance after the rally to cap off November.

On Monday, he told me that session’s rally was “a warning shot to bears who think the market can’t go up.” That advance was extended by a healthy margin Wednesday after a quiet session Tuesday, and the S&P 500 finished a turbulent month at 1,247, up 4.3% on the session and with a November loss of just 0.5%. (See “Market Rally Won’t Last Long.”)

One thing that keeps tempers Setrakian’s bearishness is the bullish flow of funds and rebalancing that happens around the start of a new month, particularly when in an asset class, stocks, that has been battered and could force some money managers into playing catch-up to year end.

The seasonality aspect was also mentioned by LPL Financial investment strategist and economist John Canally, who took a more positive view on the central bank intervention. While he can understand the bearish take on the need for such steps, he thinks the market also got a reminder that “the U.S. is not in a recession and this is not 2008.”

News flow goes both ways, Canally said, and after months of mostly troubling signs from Europe and the economy, investors were in store for a reminder. In his view, the 4% surge was the result “when the market gets jolted awake…into saying ‘maybe we’re not in a recession and the policy makers do have a handle on it.’”

Even with his more sanguine view on Wednesday’s liquidity action, Canally was quick to warn that it represents only a step toward stabilization and does little without European leaders getting their fiscal houses in order. “We don’t think it’s the end, or even the beginning of the end,” he said. Still, Canally believes the market can keep scaling the wall of worry ahead of it. “We don’t need things fixed, just stabilized.”

The market may have shown little concern into what prompted the Federal Reserve and its fellow central banks to act – the Dow Jones industrial average shot up 490 points to 12,046, the S&P 52 points to 1,247 and the Nasdaq 105 points to 2,620 – but there was

Forbes contributor Nigam Arora says the central banks would not have executed such a coordinated action unless a European bank was on the brink of failure. But they also orchestrated a different dollar-liquidity maneuver back in September, before Italian bond yields had spiked above 7% and opened the latest chapter in the crisis.

Setrakian said although there has been speculation about a major European bank possibly being at risk of failing, he had not heard any specific names mentioned leading to Wednesday’s action.

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